Is Bina Puri Holdings Bhd (KLSE:BPURI) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Bina Puri Holdings Bhd (KLSE:BPURI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bina Puri Holdings Bhd

How Much Debt Does Bina Puri Holdings Bhd Carry?

The image below, which you can click on for greater detail, shows that Bina Puri Holdings Bhd had debt of RM433.0m at the end of September 2020, a reduction from RM501.0m over a year. On the flip side, it has RM11.2m in cash leading to net debt of about RM421.8m.

A Look At Bina Puri Holdings Bhd's Liabilities

Zooming in on the latest balance sheet data, we can see that Bina Puri Holdings Bhd had liabilities of RM691.9m due within 12 months and liabilities of RM195.9m due beyond that. Offsetting these obligations, it had cash of RM11.2m as well as receivables valued at RM661.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM214.6m.

The deficiency here weighs heavily on the RM85.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Bina Puri Holdings Bhd would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Bina Puri Holdings Bhd shareholders face the double whammy of a high net debt to EBITDA ratio (15.7), and fairly weak interest coverage, since EBIT is just 0.96 times the interest expense. This means we'd consider it to have a heavy debt load. Worse, Bina Puri Holdings Bhd's EBIT was down 65% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bina Puri Holdings Bhd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Bina Puri Holdings Bhd's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Bina Puri Holdings Bhd's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to convert EBIT to free cash flow isn't such a worry. We think the chances that Bina Puri Holdings Bhd has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Bina Puri Holdings Bhd (at least 3 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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